Since the listing of Zhejiang King Refrigeration Industry Co., Ltd. (hereinafter, “Guoxiang”) on the Shanghai Stock Exchange (hereinafter, the “SSE”) in 2003, nearly 30 Taiwan-funded enterprises have been listed and raised capital in the mainland capital market. In November 2019, the China Securities Regulatory Commission (hereinafter, the “CSRC”) also clearly responded to the Proposal on the Listing and Development of Taiwanese Enterprises on the Mainland with a clear reply to actively support the listing and financing of eligible Taiwan-funded enterprises.[ii] Evidently, with the gradual development and maturity of the mainland capital market, more and more Taiwan-funded enterprises will seek opportunities to be listed on the mainland. This article will provide a brief introduction to the current listing of Taiwan-funded companies in Mainland China.
Since the 1990s, with the progression of the reform and opening-up of market economy, the mainland’s capital market has gradually developed and formed a multi-level capital market system consisting of the Shanghai and Shenzhen main boards (main boards), the small and medium-sized board (SME board), the ChiNext, the Sci-Tech Innovation Board, the National Equities Exchange and Quotations (NEEQ), the regional equity trading market, and the over-the-counter market. According to the organizational form of the capital markets and the uniformity of the trading activities, the above-mentioned capital market can be divided into the on-floor trading market and off-floor trading market, with the Shanghai and Shenzhen main boards, the SME board, ChiNext and the Sci-Tech Innovation Board as the on-floor trading market and the rest as the off-floor trading market.[iii]
In the multi-level capital market system, the financial products traded include stocks, bonds, funds and derivatives, etc., while listing, as we usually refer to it, generally means that a company’s shares are listed and traded in the on-floor trading market, i.e. on the above-mentioned main boards, SME board, the ChiNext or the Sci-Tech Innovation Board. Listed and traded common stocks denominated in Renminbi are referred to as A-shares.[iv] This article mainly introduces the status of Taiwan-funded enterprises in their listing in the trading market for A-shares.
As of August 10, 2020, there were a total of 27 Taiwan-funded companies listed on the A-share exchange,[v] but currently there are 22 Taiwan-funded companies with the remaining 5 no longer Taiwan-funded companies due to a change of the actual controllers. The total number of listed companies on the mainland is 3,989 with Taiwan-funded enterprises accounting for a small percentage, roughly 0.6%. An analysis of the existing listed Taiwan-funded companies shows that the listed Taiwan-funded companies on the mainland have the following industry characteristics: higher P/E ratios, manufacturing orientation, specialization in electronic equipment manufacture and coastal distribution.
In terms of P/E ratios, the trailing 12 months (TTM) P/E ratios of Taiwan-listed companies are higher than the annual average P/E ratios of companies listed on the same exchanges (the 2019 average P/E ratio of the SSE stocks is 14.55 and the 2019 average P/E ratio of the stocks listed on the Shenzhen Stock Exchange is 26.15).[vi] In terms of market capitalization, of all the current 22 listed Taiwan-funded companies, there are 2 above RMB 100 billion, 3 above RMB 10 billion, and the rest are all below RMB 10 billion in size. In terms of industry distribution, they are mostly in the manufacturing industry. Among them, 6 involve electronic equipment or semiconductors, and the listed Taiwan-funded companies which have a market capitalization of over 10 billion are all in this industry and account for approximately one third of the total, with the rest in the engineering services, information technology, construction materials and other industries. In terms of the stock boards where they are listed, 9 are listed on the main board of the SSE, 1 on the main board of the Shenzhen Stock Exchange (hereinafter, the “SZSE”), 8 on the SME board of the SZSE and 4 on the ChiNext of the SZSE. Geographically, the listed Taiwan-funded companies are all located in coastal areas, with 7 in Jiangsu Province, 6 in Guangdong Province, 5 in Shanghai, 2 in Zhejiang Province, 1 in Shandong Province and 1 in Fujian Province.
The following table summarizes the financial data from Flush Finance, (http://q.10jqka.com.cn/gn/detail/code/308513/), which screened the listed companies selected out of the Taiwan concept stocks as of August 10, 2020. This article further selected the stocks of listed companies whose actual controllers or controlling shareholders are natural or legal persons in Taiwan, and organized relevant information. In particular, when a stock reports a loss or is suspended from trading, the TTM P/E ratio is indicated as “-“.
Based on a search of existing cases and in reference to relevant statistical analysis data, we can see that Taiwan-funded enterprises have adopted a variety of models for listing on the mainland, but they can be generally classified into the following typical models.[vii]
1. Ordinary model: The ordinary model is the model of being listed as an A-share. Since listing conditions and procedures are the same for ordinary enterprises going public, they are not repeated here.
2. Back door listing: This refers to indirect listing achieved by obtaining the control of a listed company before assets of the company seeking back door listing are injected into the listed company and the primary lines of business and name of such listed company are changed. Cases involving the adoption of such model by Taiwan-funded enterprises include CPT Technology (Group) Co., Ltd. (hereinafter, “CPT”). CPT, which is the first Taiwan-funded company successfully listed on the A-share market through back door listing, mainly engages in the production of flat panel display devices and is controlled by Chunghwa Picture Tubes Ltd. and Tatung Company. In 2009, CPT acquired control of Fujian Mindong Electric (Group) Co., Ltd. (stock code: 000536) through major asset reorganization, and was listed in January 2010 after its implementation of major asset reorganization.
Compared with the ordinary model, back door listing follows the procedures related to major asset reorganization, which are shorter in terms of time and relatively loose in terms of the review criteria.
3. Transfer from the National Equities Exchange and Quotations (NEEQ): Quite a few enterprises have chosen to transfer their listing from the NEEQ to the main boards. The case involving a Taiwan-funded enterprise transferring its listing from the NEEQ to a main board is AA Industrial Belting (Shanghai) Co., Ltd (hereinafter, “AA Industrial”). AA Industrial is the only Taiwan-funded company whose listing on the NEEQ was transferred with its primary lines of business covering the development, production and sales of light conveyor belts. AA Industrial was listed on the NEEQ on January 24, 2014 and its application for initial public offering and listing of shares was accepted by the CSRC on March 23, 2015, and the transfer of its shares on the NEEQ was suspended on March 24 of the same year. On April 27, 2017, AA Industrial announced its application to terminate the listing of its stock on NEEQ, and its stock was listed on the main board of the SSE on May 25, 2017.
Under the model of transferred listing from the NEEQ, the main body of the listed company was originally a company listed on the NEEQ. In comparison with an ordinary listing procedure, a NEEQ-listed company may choose the ordinary listing procedure or the procedure involving a direct transfer from NEEQ. The ordinary procedure is consistent with the general listing procedure, while choosing the NEEQ transfer procedure allows direct application to the stock exchanges without the CSRC’s review.
4. T+A model: This model involves concurrent listing on both the stock exchanges on the mainland and the Taiwan Stock Exchange, with Foxconn Industrial Internet Co., Ltd. (hereinafter, “Foxconn Industrial”) being a more typical example. The main lines of business of Foxconn Industrial are the design, research and development, manufacture and sales business of various electronic equipment products. On May 11, 2018, the CSRC approved the application of Foxconn Industrial’s initial public offering of A-share and listing, and on June 8 of the same year, Foxconn Industrial’s shares were officially listed and traded on the main board of the SSE. Foxconn Industrial is indirectly controlled by Hon Hai Precision Industrial Co., Ltd., which is incorporated in Taiwan. According to the disclosure in the prospectus of Foxconn Industrial, Hon Hai Precision was set up on February 20, 1974 and is a listed company on the Taiwan Stock Exchange (stock code: 2317.TW).
Under this model, a company can broaden its financing channels by raising capital in the capital markets of both sides of the strait. However, this is precisely the very reason why it is also necessary, before and after the listing of its A-shares, to take into account of the laws and regulations of Taiwan and the requirements of the exchanges on both sides of the strait for the listing procedures and the subsequent regulatory matters if the parent company or affiliate of the main body for the listing application on the mainland is a listed company in Taiwan.
5. T to A model: This means that an enterprise previously listed on the Taiwan Stock Exchange is delisted before applying to be listed on the mainland through the integration of its assets. The listing of Universal Global Technology Co., Ltd. (hereinafter, “Universal Technology”) is a typical example of this model. The main business of Universal Technology is the development, design and production of electronic products such as communications, computers and storage, consumer electronics, industrial electronics, etc. Prior to A-share listing application, the assets and business of the company were owned by Advanced Semiconductor Engineering, Inc. and Universal Scientific Industrial Co., Ltd., both listed companies on the Taiwan Stock Exchange. After Universal Scientific was delisted due to full privatization, all of its assets were injected into Universal Technology, which then applied for A-share listing on the mainland.
Under the T to A model, the legality of the privatization of the former Taiwan listed company and the need of relevant Taiwan authorities to review its listing on the mainland are the key concerns in the CSRC’s review.
The above five models reflect, to a certain extent, the paths for the listing of Taiwan-funded enterprises on the mainland, and Taiwanese enterprises planning to go public on the mainland can use them as a basis of reference and choose to apply one or a combination of multiple models according to their own circumstances and relevant laws, regulations and policies.
At the policy level, the state is more supportive of Taiwan-funded enterprises. For example, the National Development and Reform Commission and other authorities recently issued the Circular on Coping with the Epidemic and Properly Performing Relevant Collective Work to Support the Development of Taiwan-funded Enterprises and Promote Taiwan-funded Projects to “encourage qualified Taiwan-funded enterprises to raise funds by listing on the mainland and to provide support to the listing of qualified scientific and innovative Taiwan-funded enterprises on the ChiNext.”
Meanwhile, although the state, provinces and municipalities have encouragement policies for the listing of Taiwan-funded enterprise, still the substantive listing criteria are the same for Taiwan-funded and mainland enterprises, and there is currently no special preferential treatment. Moreover, as some of the Taiwanese enterprises have gradually moved to the mainland after starting their businesses in Taiwan, there are controlling shareholders or affiliates that operate the same or similar business in Taiwan and other regions with many related party transactions. Competition among companies in the same industry and related party transactions have become relatively common issues for Taiwan-funded enterprises, and are also major concerns of the listing review departments. In fact, they may very well be major obstacles to listing.
With the development of the capital market and the implementation of the securities registration system, the financing capacity of the stock market on the mainland is gradually improving along with gradual improvement to corresponding regulation. Therefore, Taiwan-funded enterprises which choose to be listed on the mainland can raise a large amount of capital while enhancing their own visibility and management quality. Although Taiwan-funded enterprises have become an indispensable part of the mainland market and the listing application of Taiwan-funded enterprises on the mainland also has certain policy advantages, still listing preparation by way of strengthening corporate governance or conducting necessary reorganization for listing is required to meet the listing conditions on the mainland.
[i]The author is a lawyer at Shanghai Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions and do not represent the position of this law firm.
[ii]See CSRC: Letter in Response to Proposal No. 2736 (Tax and Finance Class 255) Introduced in the Second Session of the Thirteenth National Committee of the CPPCC (http://www.csrc.gov.cn/pub/zjhpublic/G00306201/201911/t20191129_366702.htm)
[iii]The picture was created by considering the contents of the following article: Dai Kang, [Guangfa Strategy] Comprehensive Analysis of the “Sci-Tech Innovation Board” – the Fourth “Guang-Sci-Tech” Series (https://www.sohu.com/a/274378633_711933/
[iv]The stock codes of main board enterprises listed on the Shanghai Stock Exchange begin with 600, 601, 603, and 605, and the stock codes of main board enterprises listed on the Shenzhen Stock Exchange begin with 000. The stock codes of small and medium-sized board enterprises begin with 002. The ChiNext is a board unique to Shenzhen, and the stock codes of listed companies begin with 300. The Sci-Tech Innovation Board is a new board created in November 2018 and is unique to Shanghai. The stock codes of the Sci-Tech Innovation Board begin with 688.
[v]According to the screening of Taiwan concept stocks (http://q.10jqka.com.cn/gn/detail/code/308513/) by Flush Finance, information such as the corporate information and holding hierarchy of the resultant companies was analyzed with each piece of information checked and verified one by one. If the actual controller is a natural person from Taiwan or a Taiwanese company, such company was then recognized as a Taiwan-funded enterprise. Meanwhile, a listed company which was previously a Taiwan-funded company but was changed and was no longer a Taiwan-funded company was included and marked.
[vi]See the 2019 Annual Stock Situation of the Shanghai Stock Exchange(http://www.sse.com.cn/market/stockdata/overview/yearly/) and the 2019 Market Situation of the Shenzhen Stock Exchange (http://www.szse.cn/market/subject/P020191231707241655061.pdf.
[vii]Please refer to the IPO prospectuses, legal opinions and other announcements concerning each Taiwanese listed company as organized and classified on the website of Giant Tide Information Network) (http://www.cninfo.com.cn/).